DCP MIDSTREAM PARTNERS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2011, 2010 and 2009 — (Continued)
comprehensive income, or AOCI, and the ineffective portion is recorded in the consolidated statements of
operations. During the period in which the hedged transaction impacts earnings, amounts in AOCI associated
with the hedged transaction are reclassified to the consolidated statements of operations in the same accounts as
the item being hedged. Hedge accounting is discontinued prospectively when it is determined that the derivative
no longer qualifies as an effective hedge, or when it is probable that the hedged transaction will not occur.
When hedge accounting is discontinued because the derivative no longer qualifies as an effective hedge, the
derivative is subject to the mark-to-market accounting method prospectively. The derivative continues to be
carried on the consolidated balance sheets at its fair value; however, subsequent changes in its fair value are
recognized in current period earnings. Gains and losses related to discontinued hedges that were previously
accumulated in AOCI will remain in AOCI until the hedged transaction impacts earnings, unless it is probable
that the hedged transaction will not occur, in which case, the gains and losses that were previously deferred in
AOCI will be immediately recognized in current period earnings.
The fair value of a derivative designated as a fair value hedge is recorded for balance sheet purposes as
unrealized gains or unrealized losses on derivative instruments. We recognize the gain or loss on the derivative
instrument, as well as the offsetting loss or gain on the hedged item in earnings in the current period. All
derivatives designated and accounted for as fair value hedges are classified in the same category as the item
being hedged in the results of operations.
Valuation
— When available, quoted market prices or prices obtained through external sources are used to
determine a contract’s fair value. For contracts with a delivery location or duration for which quoted market
prices are not available, fair value is determined based on pricing models developed primarily from historical
relationships with quoted market prices and the expected relationship with quoted market prices.
Values are adjusted to reflect the credit risk inherent in the transaction as well as the potential impact of
liquidating open positions in an orderly manner over a reasonable time period under current conditions.
Changes in market prices and management estimates directly affect the estimated fair value of these contracts.
Accordingly, it is reasonably possible that such estimates may change in the near term.
Revenue Recognition
— We generate the majority of our revenues from gathering, processing,
compressing, treating, transporting, storing and fractionating natural gas and NGLs, and from trading and
marketing of natural gas and NGLs. We realize revenues either by selling the residue natural gas and NGLs, or
by receiving fees.
We obtain access to commodities and provide our midstream services principally under contracts that
contain a combination of one or more of the following arrangements:
•
Fee-based arrangements —
Under fee-based arrangements, we receive a fee or fees for one or more of
the following services: gathering, compressing, treating, processing, storing or transporting natural gas;
and storing and transporting NGLs. Our fee-based arrangements include natural gas purchase
arrangements pursuant to which we purchase natural gas at the wellhead or other receipt points, at an
index related price at the delivery point less a specified amount, generally the same as the transportation
fees we would otherwise charge for transportation of natural gas from the wellhead location to the
delivery point. The revenues we earn are directly related to the volume of natural gas or NGLs that
flows through our systems and are not directly dependent on commodity prices. However, to the extent
a sustained decline in commodity prices results in a decline in volumes, our revenues from these
arrangements would be reduced.
•
Percent-of-proceeds/liquids arrangements
— Under percent-of-proceeds arrangements, we generally
purchase natural gas from producers at the wellhead, or other receipt points, gather the wellhead natural
gas through our gathering system, treat and process the natural gas, and then sell the resulting residue
natural gas, NGLs and condensate based on index prices from published index market prices. We remit
to the producers either an agreed-upon percentage of the actual proceeds that we receive from our sales
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